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Outsourcing Risks Worry the Wary

Senior finance executives in the pharmaceutical industry say their enthusiasm for outsourcing is tempered by regulatory, data security, and process integrity risks.

Biotech and pharma CFOs worry that by loosening their grip on their entire
enterprise and relying on third parties, they might risk losing their competitive
edge. Desired cost savings and productivity gains may fail to materialize; it may
take too much management time and attention to move operations to an
outsourcer; and quality and performance could suffer. “Pharmaceutical companies
are notoriously conservative on everything they do. They do not like to give up
control of anything,” says Andrew Bonfield, chief financial officer at Bristol-Myers Squibb.

Even though many big firms enter alliances for drug discovery, development, and
marketing, CFOs say they do not equate these practices with outsourcing. They
say alliances generally do not entail assigning an internal process to another
party. Instead a product is licensed and managed or firms work together more
closely, as in joint ventures.

In interviews, CFOs cite a number of risks that make them pause when considering
outsourcing. These include:

• Very low tolerance for error

• Dread of delay

• Meeting the demands of regulatory compliance

• Adjusting to the Sarbanes-Oxley Act

• Security of proprietary knowledge

• The management challenge

Very low tolerance for error. In the drug and biotech industries, mistakes can
carry big price tags. Regulators could delay approval, or a drug’s true effect could
be masked, compromising results. In the worst case, patients could be harmed
and massive liabilities incurred. “We have a very low threshold for error. We have
to do everything right, and we are in a hurry. We feel like people are waiting for
us to get important new products approved for the treatment of life-threatening,
life-altering diseases. That is the really key driver of our business and why we are
in one location in South San Francisco, and why we are not interested in outsourcing,”
says Joe McCracken, senior vice president of business and commercial development at Genentech.
“The cost savings do not justify the risks.”

Clearly the integrity of data has a bigger impact in pharma and biotech than in many
other industries, and as a result, companies outsource their IT functions with great
care. Russ Bantham of the Pharmaceutical Research and Manufacturers of America
cites industry fears about maintaining data integrity, saying, “If you have a glitch
and the data gets entered wrong, there’s a problem. Can you imagine sending these
things offshore, and you can’t quite understand what the IT guys are saying or they
have no understanding of the importance of the data? Misreading, losing, or
mis-entering one piece of data could result in a multibillion-dollar lawsuit.”

Dread of delay. Any delay — whether due to regulatory holdups, a flawed process,
or an inefficacious drug — is costly in the pharmaceutical industry. “Once you
present data to a regulatory body like the FDA, if they find that it is messed up,
that sets back your whole research,” says Bantham. According to another finance
executive, who asked not to be named, “The loss is pretty significant pretty quickly
if the product is out of the market for long.”

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